UK recovery ‘losing its legs’ as service sector slows

3rd October 2014

Britain’s services sector has grown at its slowest rate in three months as fears that the economic recovery is waning persist.

The services sector, which makes up for three quarters of the UK economy, has grown for 21 months but September’s Markit/CIPS purchasing managers index (PMI) – which measures activities in businesses such as hotels and restaurants – fell to 58.7 from 60.5 in August. While any figure above 50 is classed as expansion the fall is consistent with fears that the recovery is losing steam.

The PMI data follows a drop in the equivalent manufacturing index, from 52.5 to 51.6, seen on Wednesday that showed the sector is barely growing as exporters are hindered by a strong pound and weak Eurozone growth.

The PMI index also suggests overall growth in the UK in the third quarter has slowed to 0.8%, from 0.9% in Q2.

Chris Williamson, chief economist at Markit, said: ‘September’s PMI survey suggest that the UK most likely enjoyed another spell of above-trend economic growth in the third quarter, but the recovery appears to be losing its legs.

‘Although still strong, the expansion of services activity in September was in fact the weakest since June, and the worry is that slower growth in the manufacturing sector, and potentially construction as well – notably the housing market – will feed through to a further slowdown in service sector growth.’

Economic growth and job growth – which increased in the services, manufacturing and construction industries in September – are key to when interest rates rise. Bank of England governor Mark Carney has made it clear wage increases will need to happen before the Monetary Policy Committee raises interest rates from the historically low 0.5%, where it has sat for over five years.

‘The worry is that the economy could slow faster than anticipated,’ said Williamson. ‘This adds to the case for interest rates to remain on hold until next year, and at least until there are clear signs of wages and household incomes rising in real terms.’

Ben Brettell, senior economist at Hargreaves Lansdown, said the prospect of a rate rise anytime soon is ‘receding’.

‘Bank of England deputy governor Ben Broadbent has said he doesn’t think the UK economy is ready for higher interest rates,’ said Brettell. ‘Geopolitical tensions, the threat of Eurozone recession and, above all, an extremely benign outlook for inflation make it difficult to see why the Bank of England should even consider raising interest rates at present.

‘I expect MPC members [Ian][ McCafferty and [Martin] Weale to remain alone in calling for higher rates at next week’s policy meeting, and still expect the first rise to come after next year’s election.’